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November 16, 2022

What to expect in Washington (November 16)

Republicans need only one more undecided race to be called in their favor to secure control of the House for the next Congress. Democrats will control the Senate, though whether the ratio is 51-49 or 50-50 depends on the outcome of the December 6 Georgia runoff election. Democratic Senate control will act as a counter to the GOP House, as reconciliation won't be available to Republicans in a divided Congress and Majority Leader Chuck Schumer (D-NY) can control what House-passed bills are (or are not) brought to the Senate floor. Leader Schumer's ability to set the Senate floor schedule should assist in protecting his members from tough votes ahead of the 2024 elections that will have 23 seats of Democrats or Independents that caucus with them on the ballot, compared to 10 Republicans.

Leadership elections — House Republicans elected Kevin McCarthy (R-CA) as their nominee for Speaker with 188 votes — over a Freedom Caucus member who received 31 votes — though his nomination must also be backed by a majority of the entire House in a public vote on January 3, once the new Congress is seated. The Freedom Caucus opposition likely demonstrated that Rep. McCarthy will have to negotiate to win members' support and the requisite 218 votes. Rep. Steve Scalise (R-LA) was elected Majority Leader and current National Republican Congressional Campaign Chair Tom Emmer (R-MN) was elected whip.

It isn't uncommon for incoming speakers to face some initial turbulence. A Washington Post story cited the similar experiences of the two most recent Speakers, Nancy Pelosi (D-CA) and Paul Ryan (R-WI), and said, "To win the speakership in January, McCarthy will probably be forced to make concessions to some of the House's most conservative Republicans. But with his majority so slim, moderate members will also be able to make demands."

Senate Republican Leader Mitch McConnell (R-KY) also faced a challenge to his leadership from Senator Rick Scott (R-FL) and others, for reasons reportedly including the perception that he did not provide an agenda for Republican candidates to run on. Senator McConnell said that "we may or may not be voting tomorrow but I think the outcome is pretty clear," expressing confidence he will remain leader and defiance over his role in the elections. "Every one of our candidates knew what they were for, expressed it quite clearly," he said following the Senate GOP lunch Tuesday. "We underperformed among independents and moderates because their impression of many of the people in our party in leadership roles is that they're involved in chaos, negativity, excessive attacks, and it frightened independent and moderate Republican voters. And we saw that, which is why you all recall I never predicted a red wave." Senator Scott has proposed middle-class tax increases and yesterday said structural change to entitlements should accompany the next debt limit increase.

Lame-duck session — Congress is back in business but the outlook for the lame-duck session isn't exactly clear. A November 15 Wall Street Journal story described the lame-duck tax landscape, saying that while members are hopeful some tax measures with bipartisan support can get through Congress, "short deadlines and postelection uncertainty could impede those efforts," as could time spent on leadership elections, the National Defense Authorization Act (NDAA), and potentially the debt limit. The story noted that there is bipartisan support for addressing the TCJA IRC Section 174 amortization requirement, but Democrats are insistent that a Child Tax Credit expansion be part of any tax package, which could also address the IRC Section 163(j) interest deductibility calculation, expensing, and the nonitemizer charitable deduction that was in effect for 2021.

Politico reported November 15 that Senate Finance Committee Chairman Ron Wyden (D-OR), in outlining his priorities for a lame-duck session, predicted a retirement security package would be approved. Otherwise, "There's going to be a clear debate about tax choices, and this whole issue of the Child Tax Credit is front and center in that discussion," he said. For next year, he wants to develop a new tax break to subsidize housing for average Americans, in addition to the Low-Income Housing Tax Credit (LIHTC).

While conservatives' inclination to use fiscal deadlines to drive negotiations has prompted discussion of Democrats using the reconciliation process to address during the lame-duck session the federal debt limit, Senator Joe Manchin (D-WV) said November 15 that any debt limit legislation should be bipartisan and not through reconciliation. Other members were cited as questioning whether there would be enough time for the effort, which would require revisiting the budget process. Leader Schumer (D-NY) said following a Tuesday Democratic lunch that "we'd like to get a debt ceiling done in this work period," and the "best way" is bipartisan. Senator McConnell said, "I don't think the debt limit issue is until sometime next year."

Politico this morning: "Senior administration officials see little chance of attracting any Republican votes for a bipartisan debt limit hike during the short session. And they don't believe they have the 50 Democratic Senate votes needed to slam through a hike using the budget reconciliation process that would allow them to avoid a Republican filibuster."

On NDAA, Senator Schumer signaled yesterday that leaders would try to reach a bicameral agreement before bringing a Senate bill to the floor. "We think we'll get more done that way," he said.

Tax in 2023 — Prior to the election, some House Republicans said their tax priorities included legislation to roll back the Inflation Reduction Act's (IRA) $80 billion IRS funding increase, and there was reporting about the potential to take up legislation addressing TCJA temporary provisions for individuals and pass-throughs next year, well before their expiration in 2025. With Democratic control of the Senate secured, Chairman Wyden said in a Bloomberg report that his priorities would include oversight of IRA implementation and reducing housing and energy costs. The report noted that he sponsors a LIHTC enhancement bill.

Law360 reported: "The credit he envisions would be catered to Americans making between 60% and 100% of the area median income, he said. Additionally, Wyden wants to improve upon the clean energy tax provisions passed under the Inflation Reduction Act."

Global tax — Bloomberg Tax reported: "A stalled EU plan to implement the global 15% minimum tax in the bloc could be agreed by Christmas, an EU official said Monday. 'We have reasonable hope to be able to finalize it by the end of the year,' Benjamin Angel, director of direct taxation in the European Commission, the EU's executive arm, told a hearing of the European Parliament's tax subcommittee. Czechia, which currently holds the rotating presidency of the Council of the EU, in which the governments of EU countries meet, is aiming for agreement by a Dec. 16 summit of EU leaders, Vojtech Munzar, vice-chair of the budget committee of the Czech Parliament, told the subcommittee. Hungary has held up adoption of the minimum tax, saying it could harm companies at a time of economic difficulty."

Friday, November 18 (12 p.m.), is the EY Webcast, "Tax in the time of COVID-19: Update on legislative, economic, regulatory and IRS developments." Register.


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For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
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